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Supreme Court lays to rest the Most Favoured Nation Controversy

The Most Favored Nation Clause

A Double Taxation Avoidance Agreement (“DTAA”) with one country might have a different treatment for the same income as compared to DTAA with another country. To ensure that such differential treatment is avoided, and similar benefits are available across different DTAAs, DTAAs may include the Most Favored Nation (“MFN”) clause. The MFN clause is not a part of the Organization for Economic Co-operation and Development’s (“OECD”) or the United Nation’s model tax conventions and is also not a standard clause of all DTAAs. Such a clause can be negotiated and included at the discretion of the contracting states for certain income (typically investment income).

Generally, the MFN clause in India’s DTAAs provides that after signature or entry into force of a DTAA with a country, if India enters into another DTAA with an OECD member country and provides it with taxation, with a country which is an OECD member, then similar benefit would be given to the first country as well.


India’s DTAAs with the Netherlands, France and Switzerland (“MFN Countries”) have similarly worded MFN clauses. These clauses provide residents of the MFN Countries beneficial treatment under a subsequent DTAA that India has signed with a country which “is” an OECD member.

India subsequently signed DTAAs with Slovenia, Lithuania and Colombia, providing a lower rate of tax on dividend income.[1] When the DTAAs with these countries entered into force, they were not OECD members. However, they became OECD members later. Thus, the issue of whether the lower tax rates should be available to the MFN Countries arose, leading to a disagreement between the MFN Countries and the Indian tax authorities. The MFN Countries issued unilateral declarations stating that their residents were eligible for the more beneficial dividend rate from the date on which Slovenia, Lithuania and Colombia became OECD members.[2] Relying on these declarations, the Delhi High Court gave benefit to the residents of the MFN Countries in several decisions.[3]

In response, the Indian tax authorities issued a circular which laid down that the MFN clause becomes operational only on the fulfillment of the following conditions: (i) The DTAA with the third country, with the beneficial rate of tax, must be entered into after the conclusion of the DTAA with the MFN clause; (ii) the third country must be an OECD member at the time of the signing of the DTAA with India; (iii) there must be beneficial scope of taxation in the DTAA with the third country; and (iv) a separate notification importing such beneficial taxation into the DTAA with the MFN clause, must be issued.[4]

Critically, there is no requirement under the MFN clause of the DTAAs with the MFN Countries to issue a separate notification for the operation of the clause (unlike say the India-Finland DTAA). In fact, in several earlier decisions, it has been held that the MFN clause with the MFN Countries or similarly worded MFN clauses are self-operational and there is no further requirement to issue a separate notification.[5] Thus, another important issue that arose was whether there was a need for the Indian authorities to issue a notification to confer the benefit provided by the MFN clause and integrate it into domestic law or whether the clause was automatically applicable. 

Supreme Court Ruling

Recently, a batch of appeals was filed by the Indian tax authorities against the Delhi High Court’s favourable decisions. Thus, the Supreme Court (“SC”) had an opportunity to adjudicate upon the aforesaid issues, i.e., whether the MFN clause would be applicable where the third countries were not members of the OECD at the time of entry into force of their DTAAs and whether a separate notification was required to import such benefits into the DTAAs with the MFN Countries.

Separate Notification Requirement

The SC in its ruling[6] laid down that a separate notification, under section 90(1) of the Income Tax Act, 1961 (“IT Act”), is mandatory to give effect to any DTAA or its protocol that effectively changes the existing provisions of the law. The SC’s reasoning was that although the Union has exclusive power to enter into DTAAs, the Parliament has the exclusive power to give effect to such DTAAs by enacting them into law. Unless such effect is given, the DTAAs are not, by their own force, binding upon Indian nationals. The Parliament must step in when such DTAAs affect the rights of citizens or modify the law of India. No legislation is required only when citizens’ rights are unaffected, or the law is not modified.

The SC further observed that unilateral orders and decrees passed by the governments of other countries cannot be relied upon to interpret DTAAs as the manner of assimilation of DTAAs in other countries is greatly different from the manner of assimilation in India, where legislative action is required. In India, the general practice is to give benefit of the MFN clause post the issuance of a separate notification under section 90. Such a practice cannot be undermined.

Time of OECD Membership

On the issue of whether the third country needs to be a member of the OECD at the time of its DTAA coming into force, the SC, in its ruling, clarified that the phrase “is a member” implies present significance, which means that the third country must be a member of the OECD when it enters into a DTAA with India, for the earlier DTAA beneficiary to be able to claim applicability of the MFN clause.


The SC ruling is a significant departure from the earlier decisions of various High Courts and tribunals, where such a notification requirement was not found to be mandatory. India is a dualist state and every DTAA (including any protocol) is separately notified by the tax authorities. The MFN clause, being an integral part of the DTAA, is thus automatically also notified by this action. It was previously held that since the MFN clause (whether part of the main text or a protocol) is notified along with the DTAA, there is no need for a separate notification to be issued on a piece-meal basis every time it is triggered. However, the SC has understood that the MFN clause, by operation, amends the DTAA it is a part of. Thus, the apex court opined that to effectuate such amendment, a separate notification is required.

Further, taxpayers from the MFN Countries were claiming a lower rate of taxation on dividend (i.e., 5% as opposed to 10%) by relying on the favourable Delhi High Court decisions. Being an SC ruling, this decision is binding on all lower courts and taxpayers and is an important judgment which will set a precedent for the manner in which DTAAs are interpreted. This decision is bound to have an impact on all ongoing and pending cases, especially in situations where the taxpayer’s claims were made basis the previous understanding laid out by the lower courts.

From a future structuring perspective, taxpayers should ensure that the Government of India has notified the relevant MFN clause and the consequent changes resulting therefrom, before claiming any benefit thereunder.

[1] It may be noted that under India’s DTAAs with Slovenia and Lithuania, this beneficial rate is available only to those investors that hold at least 10% shareholding in the relevant Indian company from which the dividend is being sourced.

[2] Netherlands Decree No. IFZ 2012/54M (Feb. 28, 2012); Direction Générale des Finances Publiques, Bulletin Officiel des Finances Publiques-Impots (Nov. 4, 2016); and Swiss Federal Department of Finance, “Application of the Most Favoured Nation Clause of the Protocol Amending the Agreement Between the Swiss Confederation and the Republic of India for the Avoidance of Double Taxation With Respect to Taxes on Income” (Aug. 13, 2021).

[3] See Concentrix Services Netherlands BV v. Income Tax Officer, W.P.(C) No. 9051/2020 (Delhi High Court 2021); Nestle SA v. Assessing Officer, W.P.(C) No. 3243/2021 (Delhi High Court 2021); Deccan Holdings BV v.

Income Tax Officer, W.P.(C) No. 11921/2021 (2021); Galderma Pharma SA v. Income Tax Officer, (2022) 138 44 (Delhi); Cotecna Inspection SA v. Income Tax Officer Ward International Tax, W.P.(C) 14603/2021 (Delhi High Court).

[4] Central Board of Direct Taxes, Clarification regarding the Most-Favoured-Nation (MFN) clause in the Protocol to India’s DTAAs with certain countries, Circular No. 3/2022 (Feb. 2022)

[5] See, e.g., Apollo Tyres Ltd. v. Commissioner of Income Tax, W.P. No. 31738 of 2016 (T-IT) (Karnataka High Court); Concentrix Services Netherlands BV v. Income Tax Officer, W.P.(C) 9051/2020 (Delhi High Court 2021).; Steria (India) Ltd. v. Commissioner of Income Tax VI, (2016) 72 1 (Delhi); EPCOS Electronic Components SA v. Union of India, (2019) 107 227 (Delhi); Perfetti Van Melle ICT & BV v. ACIT, ITA No. 139/Del/2021; Sandvik AB v. Deputy Director of Income Tax, (2014) 52 211 (Pune – Tribunal).

[6] Assessing Officer v. M/s. Nestle SA. Civil Appeal No(s). 1420 of 2023, Decision dated 19 October 2023.